This week, the European Commission will almost certainly impose substantial interim tariffs on solar panels that it believes Chinese firms are dumping in the EU. This column explores the recent history of this case, including public clashes not only between the Commission and China but also between EU member states and Brussels. What’s actually new in this case isn’t so obvious.

Following a complaint lodged on 25 July 2012 by EU Pro Sun, an association representing around 20 EU-based producers of solar panels and components, the European Commission initiated an investigation into potential Chinese dumping of solar panels on 6 September 2012 (European Commission 2012). Nine months later, on 6 June 2013, the Commission is expected to impose provisional duties of 47% on Chinese imports of those panels. Unlike many antidumping cases where the trade flows are tiny, in 2011 China exported €21 billion of solar panels to the EU.

The Commission consulted the member states about this measure and press reports suggested that up to 17 governments, including Germany and the UK, were opposed. While the EC can impose preliminary duties without member state approval, levying final duties require the latter’s assent –a decision that must be taken before 6 December 2013. The US imposed duties on Chinese solar panel imports last year. Press reports suggest that EU, US, and Chinese officials are open to negotiating a solution for this sector.

Few trade disputes in recent years have generated so much public recrimination, much of it since mid-May. On an official visit to Europe, Chinese Prime Minister Li said of the proposed duties: “We don’t agree with this decision and emphatically reject it.” Angela Merkel noted, “Germany will do all it can so that this won’t lead to import tariffs … That’s not something we believe in.” France’s industry minister took a different stance, arguing: “Countries that use protectionism, and China is one of them, should accept reciprocal rules”. The European Commission Trade Commissioner told a committee of the European Parliament: “they (the Chinese) are not going to impress me by putting pressure on member states”. The EU Chamber of Commerce in China found it convenient in late May to release a report claiming that European firms had lost nearly €17.5 billion in sales due to Chinese policies.

What should independent observers make of this dispute? Does the rhetoric match the reality? What’s new here?

China: Violator, victim, or both?

The European Commission has argued that the export behaviour of Chinese solar panel producers is not an isolated problem and is a consequence of pervasive state intervention in the Chinese economy. Commissioner De Gucht has developed this theme in a number of speeches on China during the past 18 months1 and recently told an audience in Brussels that dumping is “happening in a number of industrial sectors and it is very easy to find them: you read the last five-year plan [set by the Chinese government] and you can identify them, and it is in those sectors that it is happening”. He also observed: “what [this case] is about is whether or not they have to respect a certain number of disciplines, a certain number of rules and conventions that add up to fair competition. It is whether we can accept that they can dump as they wish”. Emphasising the upside, De Gucht has argued that with reforms he expects fewer disagreements with Beijing in the future.

These arguments’ force is blunted somewhat by the harm done to Chinese commercial interests from European attempts to tilt the playing field in favour of its firms. Since the first Crisis-era G20 summit in November 2008, when the EU joined others in eschewing beggar-thy-neighbour policies, the Commission and the 27 member states have together implemented 116 measures that harm Chinese commercial interests, only 16 of which have been unwound. What’s particularly interesting is that, of the European measures harming China, 50 involve European firms receiving some type of trade-distorting subsidy.2

European state-backing for private firms has many parallels with the Chinese experience. European subsidies are not confined to a few sectors. Nor are European subsidies necessarily transparent. For example, the financing terms offered on car purchases are an important source of competitive advantage and, therefore, it is significant that certain leading car manufacturers have used their in-house banks to borrow at unusually low rates from the ECB, steps some have confirmed to journalists.3 Recently, France went further and offered guarantees to Banque PSA Group, which finances Peugeot and Citroen so that they in turn can offer generous terms to car buyers (see Global Trade Alert 2013).

As in China, state support for European firms comes from many sources, including opaque state-influenced banks. EU rules on state aids offer little restraint, key elements of which were suspended at the beginning of the Crisis. None of this is to deny Chinese state intervention4 but independent observers are entitled to ask ‘Is the pot calling the kettle black?’. A cheeky Chinese policymaker could make much of European state intervention.

EU trade policy: Strength through unity?

The EU is supposed to speak with one voice on trade policy, or so we are frequently told. Does this case represent a departure from existing practice? Arguably not. Although the Commission takes the lead, depending on approval from the member states at key stages. Rejection of Commission proposals by the member states isn’t hypothetical: on 21 May 2013 they rejected a proposal from the Commission to extend antidumping duties on imports of polyethylene terephthalate from Malaysia, Taiwan, Thailand, India, and Indonesia (European Union 2013).

Moreover, research has shown that this set up creates leverage for member states and, indirectly, for the governments of trading partners seeking to influence European Commission trade policy. Having compiled newspaper reports on member state votes on antidumping matters from 1991 to 2003, Evenett and Vermuslt (2005) showed that the original 15 members of the EU split into three groups. The frequency of votes in favour of restricting imports is shown in Figure 1.

Portugal, France, Italy, Greece, and Spain tended to vote to restrict imports 85% of the time. The UK, Luxembourg, the Netherlands, Finland, Germany, Sweden, and Denmark voted at most one sixth of the time for import restrictions. Belgium, Austria, and Ireland were the swing voters and there was a strong sense that these three nations traded their votes for broader diplomatic advantage. In 2011 the Swedish Board of Trade (see Nordström 2011), which had official access to the votes taken, confirmed the pattern of voting found by Evenett and Vermulst (2005). Splits among the member states, then, have been going on for some time – suggesting that the EU antidumping process is more politicised and less technocratic than some might want observers to believe.

Figure 1. Member-state votes for restricting dumping imports

Evenett and Vermlust (2005) also documented six steps that the European Commission has taken to increase the number of member states willing to support the imposition of final antidumping duties. This finding highlights the negotiations that go on behind closed doors in Brussels – and implies that, just because so many member states are reported to be opposed to preliminary duties on solar panels, it doesn’t mean that the European Commission won’t be able to muster support for the imposition of final duties. Foreign trading partners facing antidumping duties are not powerless either. Eight tactics were documented from press reports by Evenett and Vermulst (2005), including direct lobbying of the member states.

China’s growing economic clout has given rise to fears of retaliation should Brussels impose duties or if European firms complain to Brussels about Chinese policies and exporter behaviour. Indeed, the Chinese delegation to Brussels issued the following statement after a meeting on 27 May 2013 between its Vice-Minister for Foreign Commerce and Commissioner De Gucht:

“If the EU were to impose provisional antidumping duties on Chinese solar panels and to initiate an ex officio case on a Chinese wireless communications network, the Chinese government would not sit on the sideline, but would rather take necessary steps to defend its national interest. Despite the heightened risk of the China-EU bilateral trade disputes widening and escalating, the Chinese government would nevertheless make a best effort for hope of reaching a consensus and avoiding a trade war, but this would require restraint and cooperation on the EU’s part.”

Strong words, but is it all bluster? Recent research has examined the impact of EU-Chinese diplomacy on the share of exports that EU member states ship to China. Contrary to fears of retaliation, EU member states that have a history of complaining to Brussels about Chinese dumping were found to have – all else being equal – higher export shares to China. Moreover, EU member states that send more ministers to Beijing have higher export shares as well. A Jekyll-and-Hyde strategy towards Beijing seems to pay off (Evenett, Fritz, and Wermelinger 2013).

Maybe Chinese retaliation will be tougher in the future and maybe some EU firms have been targeted in the past – but, as far as aggregate export flows are concerned, complaining about Chinese unfair trade practices appears to pay dividends. Consequently, European commercial diplomacy on unfair trade cases may not only be about Chinese dumping and subsidies. Plus, the public recriminations associated with the solar panel case fit into an established pattern of ‘managing’ European unfair trade investigations.

Not quite business as usual

While features of the solar panel case follow established patterns, three broader policy-relevant matters are raised by this case that governments and analysts might dwell upon:

The first concerns supply chains.

Given that the competitiveness of the European corporate buyers of solar panels would be harmed by imposing duties, is the political logic of anti-dumping fit for purpose given the realities of 21st-century commerce? In the past governments have been willing to sacrifice the welfare of final consumers on the altar of unfair trade but what of export-oriented firms?

As to the resort to these measures, some have contended that pervasive supply chains account for the limited resort to protectionism since the onset of the financial Crisis (Baldwin 2010). It doesn’t seem that a huge amount of trade involved in the solar panel supply chain prevented antidumping cases going forward in the EU and the US. Does our understanding of Crisis-era protectionism need to be revised?

The second broader matter arises as to whether there are better ways for leading trading powers to react than resort to anti-dumping and anti-subsidy investigations?

This case has been linked to wider concerns about China’s industrial structure and policy mix. Given the extensive Crisis-era intervention in European markets, one alternative worth considering is a coordinated phasing out of Crisis-era intervention.

Finally, the solar-panel case should be seen in the context of Western attempts to discourage China – as they see it – from free riding on global public goods, such as an open trading system.

Again, questions of approach arise. Suppose the current dual strategy – of negotiating free trade agreements that deliberately exclude China and selectively hitting certain Chinese exports with heavy duties – induced China to seek a broad-ranging negotiation with the US and the EU. Could the West really live without the room for manoeuvre allowed for under current trade rules that they took so much advantage of in recent years? Could China call the West’s bluff?

References

Baldwin, Richard (2010) “Unilateral tariff liberalisation” in The International Economy, Journal of The Japan Society of International Economics 14, 10-43, also NBER WP 16600.

2 See entries in the Global Trade Alert database for export subsidies and trade-affecting bailouts and subsidies implemented by the EC or the member states and harming Chinese commercial interests, which can be recovered from http://www.globaltradealert.org/advanced-search# . At this point it is worth dispensing with one red-herring, namely, that the EU Crisis-era bailouts only refer to the financial sector. Of the 50 subsidies harming China, only five refer solely to the financial sector.

4 In the interests of balance, China has taken 52 Crisis-era measures that have harmed the commercial interests of the European Union, only three of which have been unwound. Perhaps the most far-reaching Chinese intervention that affects trade is its use of VAT rebates to exporters, whose scale expanded considerably once the Crisis began (see Evenett, Fritz, and Yang 2012 for an account of this elaborate form of Chinese export-management practice).